... EBay, which acquired its stake in Craigslist in 2004, said the actions of the Craigslist board had diluted its economic interest in the company by more than 10 percent, but did not specify what those actions were.

EBay said it filed the suit under seal to protect information about Craigslist governed by confidentiality restrictions....

Most changes which effect percentages of ownership, or stake, in a company do not initially devalue the shares monetarily. I would imagine that the hullabaloo here is limited to the degree of control alloted by the percentage of ownership. And what power to influence board seats, policy and or practices is key to the percentage of ownership.

Remember, it wasn't until after eBay acquired 28+% of Craigslist that Craiglist began charging for selective ads like help wanted and dealership automotive. You can be sure that eBay has other revenue producing gems in abeyance at Craigs -- diluting their power by lowering their percentage of ownership can stymie implementation of those "enhancements."

A simple way would be to issue a reserve or internal stock in a big way through stock options or using corporate held (never before issued treasury stock/retained earnings) stock shares to make an large acquisition. Adding new shares to the outstanding would dilute the % held by any existing shareholders/groups. Has to be done according to SEC guidelines, but happens all the time.

Increasing outstanding common stock = stock dilution: in general it results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into stocks. This dilution can shift fundamental positions of the stock such as ownership percentage, voting control, earnings per share, value of individual shares. A broader definition specifies dilution as any event that reduces an investor's stock price below the initial purchase price

This would have to be a fairly large issuance or stock split/conversion to cause a dilution as large as eBay is claiming.

EBay has filed a lawsuit alleging that some changes made by Craigslist's board of directors have diluted eBay's investment in the online classified site.

EBay filed the lawsuit on Tuesday in the Court of Chancery of the State of Delaware, the company said. The complaint was filed under seal because some of the information about Craigslist is governed by confidentiality restrictions, eBay said.

EBay, which acquired a 28.4 percent interest in Craigslist in 2004, didn't provide details about the actions taken by Craigslist's board, but it said that Craigslist CEO Jim Buckmaster and founder Craig Newmark have entered into transactions that have "unfairly diluted eBay's economic interest in Craigslist by more than 10 percent."

In an entry titled "Tainted Love" that Craigslist posted on its blog Tuesday night, the company said the allegations are unfounded and the lawsuit came from out of the blue.

"Coming from a company that views Craigslist as a prime competitor, filing suit without so much as mentioning these assertions to us beforehand seems unethical, and suggests ulterior motives. ... Ebay has absolutely no reason to feel threatened unless a hostile takeover of Craigslist, or the sale of Ebay's stake in Craigslist to an unfriendly party, is their ultimate goal," the post said.

EBay, the world's largest online auctioneer, was an unsolicited suitor to quirky Craigslist in 2004. An unnamed former Craigslist shareholder sought out eBay and sealed a deal whose financial terms were never disclosed.

At the time, Newmark said the companies had similar philosophies, but a company spokeswoman said, "Craigslist has never sought any outside money, and that's not going to change."

EBay said at the time of the deal that it was interested in learning about the classifieds business, a portion of its own site that's been growing rapidly in recent years.

San Jose-based eBay made $7.7 billion in revenue in 2007 and has 279 million registered users. It is the 17th most popular English-language site, according to traffic ranking site Alexa, while Craigslist ranks 45th.

Craigslist, based in San Francisco, has never disclosed revenue figures. It charges for job ads and apartment listings only in select cities.

Newmark, a former IBM programmer, founded Craigslist in 1995 as a roundup of local events in San Francisco, but the bare-bones site fast became a popular online destination and has branched out to 450 cities worldwide. Although it has always used a ".org" domain name usually associated with nonprofits, Craigslist incorporated as a for-profit company in 1999.

With 25 employees working out of Victorian houses in San Francisco's Inner Sunset neighborhood, the site has grown from 1 billion page views...

San Jose, Calif -- April 22, 2008 — In order to safeguard its four-year financial investment in craigslist, eBay (Nasdaq: EBAY; ) today filed a lawsuit in the Court of Chancery of the State of Delaware challenging recent transactions implemented by craigslist's board of directors, consisting of Craig Newmark and Jim Buckmaster.

In 2004, after negotiating the transaction with craigslist's board, eBay acquired a minority ownership interest in craigslist of 28.4 percent.

In January 2008, however, Newmark and Buckmaster adopted measures that, among other things, unfairly diluted eBay's economic interest in craigslist by more than 10 percent. By taking these unilateral actions, eBay believes that Newmark and Buckmaster breached their fiduciary duties in violation of Delaware corporate law.

"The recent actions by the craigslist directors have disadvantaged eBay and its investment in craigslist," said Mike Jacobson, eBay Senior Vice President and General Counsel. "Since negotiating our investment with craigslist's board in 2004, we have acted openly and in good faith as a minority shareholder, so we were surprised by these recent unilateral actions. We are asking the Delaware court to rescind these recent actions in order to protect eBay's stockholders and preserve our investment."

The complaint is being filed under seal because some of the information about craigslist contained in the complaint is governed by confidentiality restrictions.

About eBay Inc.
Founded in 1995, eBay Inc. connects hundreds of millions of people around the world every day, empowering them to explore new opportunities and innovate together. eBay Inc. does this by providing the Internet platforms of choice for global commerce, payments and communications. Since its inception, eBay Inc. has expanded to include some of the strongest brands in the world, including eBay, PayPal, Skype, StubHub, Shopping.com, and others. eBay Inc. is headquartered in San Jose, California.

Good for Craigslist! Finally, someone boldly stands up to the giant before it has a chance to assert its control. Ebay has spent years gobbling up the competition... Apparently, Jim Buckmaster isn't going to allow that to happen to Craigslist :D

My concern is that craigslist may not have enough money to fight the legal fight. eBay doese not have to win. It just needs to bankrupt the company through lengthy legal proceedings. It would not surprise me if craigslist community donote to a legal fund to stand up against eBay.

eBay had filed a corporate governance lawsuit against Craigslist in the Court of Chancery of the State of Delaware on April 22 accusing Craigslist founder Craig Newmark and CEO Buckmaster of breaching their fiduciary duties in violation of Delaware corporate law (http://www.auctionbytes.com/cab/abn/y08/m05/i01/s01).

In return, Craigslist filed a lawsuit against eBay on May 13, 2008, in the Superior Court in San Francisco for breach of fiduciary duty. The lawsuit alleges eBay engaged in anti-competitive behavior and also claimed trademark infringement and false advertising. Craigslist alleged that eBay placed ads on the Google website featuring Craigslist's name, but directed users to eBay.com and Kijiji.com.